Understanding Federal Student Loan Repayment Plans

If you have a federal student loan, you may be curious about your repayment options. Luckily, federal student loans are most beneficial to those needing repayment assistance; the majority of these plans will help you lower your monthly payment at the expense of extending your loan term several years.

If you do not fit into this category and wish to consolidate and change your repayment terms, a different way look is into a private consolidation or refinancing. As you have no need for federal repayment plans, you can adjust your loan terms, consolidate your loans, and potentially reduce your interest rate.

Check with your loan servicer to see which plans are available to you.

Standard Repayment Plan

Direct Loans (subsidized and unsubsidized) are eligible for the standard repayment plan. Subsidized and unsubsidized Federal Stafford Loans and all PLUS Loans are also eligible. Payments are fixed with a minimum of $50 per month and a total payment term of up to 10 years. This is the default plan for most federal student loans.

Graduated Repayment Plan

Like the standard repayment plans, Direct (subsidized/unsubsidized), Stafford, and PLUS Loans are all eligible. The difference is that payments start low then gradually increase, usually every two years. The payment term maximum is 10 years or up to 30 years for Direct Consolidation Loans.

Some prefer this plan since you can pay less at first, which may be helpful, if you are just getting started working. Monthly payment will never be less than the amount of interest that accrues between payments.

Extended Repayment Plan

The loans eligible under this plan are the same as for the standard and graduated plans. For extended repayment, your payments may be fixed or graduated. Monthly payments are lower with this plan, however, to qualify you must have more than $30,000 in either Direct Loans or FFEL Program Loans.

One reason some graduates choose this plan is because you can extend your payment term up to 25 years. This means monthly payments are lower, however, you end up paying more on your loan interest.

Income Based Repayment Plans

Under this income-driven repayment plan, your maximum monthly payment is capped at 15 percent of your discretionary income. Your payments are adjusted as your income changes, and the payment term is up to 25 years.

To qualify for this plan, you must demonstrate partial financial hardship. As compared to the standard repayment plan, your monthly payments are lower with income based payments. You also pay more on interest with this plan.

If your loan is not paid off after the equivalent of 25 years of making payments, the remaining balance will be forgiven. However, you might have to pay income tax on the forgiven debt amount.

Pay As You Earn Repayment Plan

With Pay As You Earn, your monthly payments are limited to 10 percent of your discretionary income. You payments are made over a term of up to 20 years, and to qualify you must demonstrate partial financial hardship. Like the income based plan, you’ll have lower than standard monthly payments.

Similar to income-based payment, you may have taxable loan forgiveness at the end of the 20-year term.

Income Contingent Repayment Plan

Direct (subsidized/unsubsidized), Direct PLUS (made to students), and Direct Consolidation Loans are all eligible under this plan. Payments are calculated based on your income, number of family members, and the amount of Direct Loan debt you have. Payments are income adjusted with a term of up to 25 years. Taxable loan forgiveness is available after completing the equivalent of 25 years of payments.

Income Sensitive Repayment Plan

The loans eligible under this plan are subsidized/unsubsidized Federal Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans. Monthly payment is based on your adjusted annual income with a maximum term of 10 years. Under this plan, monthly payments can vary depending on calculations made by each lender.

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